AgBank's IPO Reflects China's Lending Hangover

Agricultural Bank of China's $22 billion initial public offering is making headlines as potentially the world's biggest. It also underlining the cash squeeze Chinese banks are facing after a massive lending binge.

Original forecasts had put potential proceeds from the offering at a whopping $30 billion, much more than what the bank, also known as ABC, will actually take in. But the lender had little choice about the timing. China's banks are now strapped for cash having lent a record 9.6 trillion yuan ($1.4 trillion) in 2009 to support Beijing's economic stimulus.

Regulators have ordered them all to shore up their balance sheets.

"The IPO's timing was not up to ABC itself. It simply has to get this IPO assignment done to raise funds in the market to fulfill its cash requirements," said Zheng Ning, an analyst at Founder Securities in Beijing.

"All the banks are facing a huge gap in cash flow, and the massive demand for capital will definitely weigh on the market in the short term," Zheng said.

ABC is selling 25.41 billion shares in Hong Kong and 22.24 billion shares in Shanghai. Based on Tuesday's pricing, the rural lender would raise about $19.23 billion, according to a person familiar with the deal.

The person requested anonymity because details of the IPO were not due to be released until Thursday.

If underwriters buy about $2.89 billion more shares to sell to investors in an overallotment, or greenshoe, option, the dual listing could raise $22.12 billion — the most funds ever for an IPO. Industrial and Commercial Bank of China raised $21.9 billion in its October 2006 IPO — the existing record and the only other time a company listing in Shanghai has used a greenshoe option.

Investors were apparently unprepared to pay the original higher price suggested for the shares because ABC is viewed as weaker and less profitable than its urban-focused competitors.

In Hong Kong, ABC's shares priced at HK$3.20 each (41 cents), the midpoint of the expected range, the person said. In Shanghai, shares are priced at 2.68 yuan (40 cents), the top of the expected range, the person added.

A dip in the benchmark Shanghai Composite Index to a 15-month low on Monday underscored worries that the offering might overwhelm investor demand. The global IPO market also has suffered this summer, as shares tumbled amid mounting uncertainty over the economic recovery.

But shares bounced back Tuesday in Shanghai on bargain hunting — just the kind of buying interest that is helping ABC, says Zheng: "It's precisely a bit easier to sell shares at a lower price."

The Shanghai benchmark rose 0.5 percent, or 11.69 points, to 2,421.12 Wednesday on news the social security fund was buying shares. Liquidity pressures also eased as ABC wrapped up its IPO subscriptions.

The bank's shares are due to begin trading July 15 in Shanghai and a day later in Hong Kong.

The bank won strong backing both from sovereign funds and other institutional investors, especially China's government institutions, and from retail investors who view China — despite its recent market malaise — as the best growth story on offer.

Some 114 Chinese companies raised $20.2 billion in IPOs on 10 exchanges in the first quarter of this year, with most of the funds raised in Shanghai, Shenzhen and on the entrepreneur-oriented ChiNext board.

ABC reported assets totaling $8.5 trillion by the end of 2009. As China's main rural lender, even after restructuring it carries the largest nonperforming loan ratio of the big mainland banks, at 2.9 percent — a figure analysts say is understated.

But the bank is also emphasizing its ties with dozens of big state-run companies and the growing share of its income from insurance, broking, investment banking and cash management businesses.

"Rural markets are low profit compared to the big cities, but if ABC makes better use of its resources to expand in the countryside, it would own its own blue ocean," said Peng Yunliang, an analyst at Shanghai Securities in Shanghai.